The scrap market is no longer confined to what the United States is doing. While China has dominated the focus throughout the last few years, many other countries, for better or worse, are affecting the U.S. scrap recycling economy. Among these countries are Brazil, Russia, India and China, otherwise known as the BRIC countries.
While this global marketplace holds varying degrees of opportunity for U.S. companies (including recyclers), pitfalls and dangers also lurk. But, as the old bromide goes, "The greater the risk, the greater the reward."
While there are opportunities and successes outside the conventional North American market, issues occasionally crop up. It is imperative to fully understand the overall dynamics of the country as well as the fundamental issues that may affect business.
CHINA’S INSATIABLE APPETITE. The Chinese market, which has generated significant amount of attention throughout the past several years, has moved from a region of uncertain interest to one more people say they have to be involved in. Whether that means opening up a plant or office to be closer to the booming Chinese economy is relative. But one thing almost everyone agrees on is that China will remain in a dominant position in the recycling industry for a long time. As China looks to speed up its modernization program, demand for raw materials, including various types of secondary commodities, will remain high.
Despite robust buying by Chinese interests, there are concerns.
While manufacturing has been a key driver for the surge in demand for various types of recyclables, the lack of power available in China has presented a problem. As new factories are built in China, many are faced with routine power outages and shutdowns because of the lack of available power. This trend will likely keep manufacturers from fully maximizing their operations.
Additionally, many new, massive, highly efficient manufacturing operations are coming online in China while many smaller, more antiquated facilities continue to churn out much smaller amounts of steel, paper or other material. The Chinese government estimates that there are around 830 steel mills in the country, with most of them being unable to compete internationally.
To combat this, the Chinese government has implemented a new policy to reduce the number of steelmakers operating in the country, allowing the larger companies, such as Baosteel, to control more production through mergers and acquisitions. Through this policy China expects that its top 10 steelmakers will control more than 50 percent of the nation’s total steel output by 2010 and more than 70 percent by 2020.
THE RISE OF INDIA. India is heralded as the world’s largest democracy. This fact, many feel, will contribute to the promising future for this country.
During a presentation at the Institute of Scrap Recycling Industries Inc.’s 2005 convention, Andy Goenka, with Steelbro Inc. in Oyster Bay, N.Y., said that India’s cost of production for steel is among the lowest in the world. "India is going to be a dominant player in the steel sector," he said.
In the nonferrous market, India expects aggressive growth ahead. By 2020, the nonferrous metals industry, mainly aluminum, copper, lead and zinc, will be completely privatized. India is becoming a global player in the nonferrous metals industry. "Sweeping changes are already evident in this industry, which is shredding its traditional image of complacency in favor of aggressive growth," Goenka said.
He continued, "India’s aluminum capacity is slated to cross 1.25 million tons per year in the next five years, a growth of 50 percent. Copper capacity is expected to touch 1 million tons per year in five years, a growth of 100 percent. India is expected to attain complete self sufficiency in meeting its zinc demand and expects to become an important zinc supplier to the world."
He added, "These capacity enhancements are good news for all scrap dealers as this will generate a huge demand for scrap metal in the future."
Ashok Kumar, with A-1 Specialized Services, a Croydon, Pa., company that conducts a significant amount of business with India, says China and India share a pack mentality. Instead of purchasing when prices have cooled, he says Indian buyers end up getting into bidding wars with Chinese buyers. When orders are strong from China, they will likely be strong from Indian consumers.
Despite this mindset, Kumar says manufacturing in India is growing. These new manufacturing plants will continue to boost the overall demand for many raw materials.
Where India may hold an edge over China moving forward has been the more liberal economic policies, including the role of foreign investment in the country.
Earlier this year the Indian Union Cabinet cleared the hike in foreign investment for telecommunications to 74 percent from the previous 49 percent. By allowing greater foreign investment, India hopes it will result in greater amounts of capital to be invested in the country.
One other area that may help boost the long-term opportunities for scrap recyclers in India is that business leaders in the country are citing the damage caused by monsoons as a reason to improve the country’s infrastructure. This would result in greater demand for steel, as well as other materials. The investment in the infrastructure also will help ensure strong economic growth for India.
THE PUZZLEMENT OF RUSSIA. While steel production historically has been centered in North America, over the past 10 years this trend has declined. According to a recent report by Standard & Poor’s, steel production now is booming in regions outside North America. These fast growing regions include Russia, Brazil, India and China.
Analysts expect that as the steel industry dynamics change, more steel making will gravitate toward Eastern European countries, where costs are much lower. Additionally, Russia and other countries outside Western Europe will benefit in light of their relative proximity to raw materials, as well as their access to cheaper power.
However, as much as the opportunities for stronger manufacturing in Russia appear likely, government policies have sent mixed signals to the marketplace. In a report for the Bureau of International Recycling, Ildar Neverov with Siberia Recycling, a Russian scrap metal firm, said that at the end of July, Russian President Vladimir Putin rejected a federal law on state regulation of ferrous and nonferrous scrap metals, which had been accepted earlier in the month by the Russian Duma and approved by the Federation Council. The law had been under discussion in the Duma since last year and had been the focus of a special working group consisting of scrap and metal industry representatives.
Putin said he rejected the law because it offered "no significant improvements in comparison with existing legislation."
However, Putin approved amendments to the Russian Tax Code relating to VAT payments by scrap dealers. From the beginning of next year no VAT will be paid on deals involving scrap metals, including export deals.
The scrap industry has been seeking a reduction in the export rate of 15 percent, whereas scrap consumers have been pushing for state regulation of exports. However, this matter has been set aside for further negotiation and, instead, the Duma paid much more attention to the matter of illegal scrap activity. In particular, the law proposed a restriction on individuals to manage some types of scrap and a requirement to obtain a special license in order to melt scrap metals.
BRAZIL’S INSTABILITY. Despite an abundance of natural resources, Brazil, the largest economy in South America, has been hit by government corruption accusations, which, some say, could result in derailing a strong economic boom enjoyed by the country over the past several years.
According to published reports, Brazil’s economy is expected to grow at a rate of 2.5 percent this year, among the slowest rates in Latin America, and about half of last year’s growth rate.
The collateral spillover from the uncertain political situation in Brazil has resulted in a sharp hike in interest rates, which works to reduce consumer demand. Published reports had interest rates reaching 19.15 percent. Gross domestic product in Brazil is expected to expand by 3.4 percent this year, far less than the initial expectation.
Reflecting the trickle-down impact of higher interest rates, Metalurgica Prada SA, the largest manufacturer of tin cans in the country, announced it is scaling back spending on machinery as consumers are reducing its purchases of good and services.
Factory usage declined to 79 percent in May of this year, down sharply from the 84 percent usage level enjoyed in December 2004.
While Brazil has many problems, many companies have not been deterred from increasing their business ventures in the country. Arcelor, one of the largest steel companies in the world, recently consolidated its controlling stakes in various companies into a single entity that is the largest steel company in Latin America.
Venturing forth to increase business in countries outside the comfort zone may pose some peril for scrap dealers. However, the opportunities that are available with increased exposure to Brazil, Russia, India and China, as well as in other countries, can be tempting. However, while opportunities abound, the dangers are plentiful as well.
The author is Internet and senior editor of Recycling Today and can be e-mailed at dsandoval@gie.net.
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