Hearty Appetite

China has long held claim to being the world’s largest nation by population. Until the nation began to ramp up the dramatic economic reforms that began in 1978, however, its role in the global economy and its standing within global commerce statistics was stunted.

The economic reforms, which began with a handful of free-trade zones, have unleashed a dragon as powerful as any in ancient mythology. From 1978 to 2010, China’s economy has grown by a percentage that is difficult to calculate. (“Almost a hundredfold” is how one economist quoted by China Daily in 2009 characterized it.)

With an annual average GDP growth of 10.5 percent between 2001 and 2010, according to the International Monetary Fund (IMF), China has been the indisputable champion of economic growth in the prior decade.

In the basic materials sector, part of that growth (as readers of this publication can attest) has been fueled by scrap materials imported from the United States and other nations.

Although there remain business cycles and ups and downs (and notwithstanding the sub-prime-mortgage-induced crisis of 2008), scrap recyclers have enjoyed a remarkably healthy demand for their materials for more than 10 years, and often China is a leading cause.

But in business as in life, all good things must come to an end. Even as they have enjoyed the boom of the past 10 or more years, recyclers find themselves asking: What happens as some of the factors causing Chinese scrap metal, paper and plastic buyers to need this material begin to change? What might be the effects when Chinese buyers start backing away from the table, either because of reduced appetites or because they have the ability to satisfy their appetites with materials from closer to home?
 

Intensity Levels
Metals industry consultant Tony Taccone of First River Consulting, Pittsburgh, at times refers to “steel intensity” relative to the economic growth and development of nations.

On their “Nerds of Steel” website and blog (www.nerdsofsteel.com), Taccone and business partner James Moss post links to and comment upon steel industry research and forecasts, including those relating to the steel intensity of China.

In August 2010, Taccone posted a link to a study by Australian researchers that predictes China’s steel intensity will peak around 2024, when China’s GDP per capita reaches $15,000.

The Australian forecasters also predicted, according to Taccone, that “the peak level of steel demand will be 700 to 800 kilgoram per capita, which suggests China will consume 1.1 billion metric tons of steel by then, up from 542 million metric tons consumed in 2009.”

Taccone adds in his blog post, “If China peaks at 700 to 800 kilograms per capita, [it] would be above average but below South Korea. By comparison, U.S. steel intensity peaked at 525 kilograms per capita in 1973 and is now below 400.”

Determining the timing and level of peak intensity—whether for steel, copper or cardboard—is a critical variable in determining how long China will maintain its substantial appetite for North American scrap materials.

China’s rapid economic development is considered by economists as far and away the leading cause of the commodity price surge of the past 12 years, whether for ores, energy resources or scrap materials. A nation of 1.3 billion people growing its GDP year after year in the range of 8 percent to 10 percent has had a massive impact on the size of the world’s demand for steel, copper and paper industries.

According to the Lisbon-based International Copper Study Group (ICSG), global production of refined copper stood at slightly more than 17 million metric tons in 2006. Just five years later, in 2011, that total had climbed to just less than 20 million metric tons, with Asia almost entirely responsible for the growth.

As nonferrous scrap processors in the U.S. can attest, buyers representing Asian copper producers have shown a tremendous willingness to absorb as much red metal scrap as recyclers would like to sell.

Among the more remarkable side effects has been that even after U.S. construction fell dramatically after the 2008 financial crisis, copper (and copper scrap prices) recovered quickly as export buyers continued to seek out red metal scrap.

In previous decades, if the U.S. construction sector caught a cold, the copper scrap market sneezed along with it.

After the past several years, recyclers and traders of scrap materials in North America are paying far more attention to the health of the Chinese economy, figuring that if China catches cold, the symptoms are certain to travel overseas.

The rate at which apartment towers, office buildings and transportation arteries are being constructed in China is now of utmost interest to scrap recyclers, since these metals-intensive activities ultimately rely on scrap feedstock.

Similarly, paper and plastics recyclers in North America maintain an interest in China’s consumer economy, since the growth of a middle class with purchasing power in China has been a boon to the packaging industry there.

“In regard to recovered paper and plastics, it is safe to say China has not yet reached its peak requirements,” says Peter Wang, chief executive officer, Worldwide Marketing for America Chung Nam (ACN), based in Los Angeles. “According to China Customs, there was a 12 percent increase in 2011 of imported recovered paper,” says Wang. “As China continues to develop domestic consumption and more of the population moves into middle class, per capita use of paper and plastic products will continue to increase.”
 

Shorter Loops
China’s demand for scrap materials is a foremost factor on the demand side for scrap processors and traders. The ability of China to source more scrap materials within its own borders is a key variable on the supply side.

On the plastics side, Wang says Chinese manufacturers (led by those in the packaging, construction and appliance sectors) consumed some 18 million metric tons of plastic scrap in 2009. Some 10 million tons of that (56 percent) was sourced domestically but 8 million tons (44 percent) was imported.

In a presentation at the 2012 Paper & Plastics Recycling Conference Middle East (www.PaperRecyclingConference.com), held in Dubai in late February, Peter Engel of Atlanta-based Moore & Associates referred to China’s demand requirements as well as its ability to supply itself with scrap materials as he offered an overview of the state of global recovered fiber markets.

Engel remarked that demand for high-grade fiber is likely to increase as China’s Nine Dragons paper company ramps up two machines that will produce printing and writing paper. The global tissue market, as well, was characterized by Engel as a “major growth sector in all regions of the world.” Foreign mills in particular were absorbing significant amounts of recovered fiber, he said.

High-grade supply changes are considerable, however, Engle observed. “Conventional office paper recycling programs are declining in favor of mixed paper and single-stream” collection efforts, he said. “Currently, Moore & Associates estimates that up to 65 percent of SOP (sorted office paper) in the U.S. is shredded paper, which is up from less than 10 percent in 2000.”

Adding to high-grade scarcity is the decline of the book, magazine and directory printing industries in the U.S. “The supply of pre-consumer grades is declining due to the overall downturn in the printing industry,” said Engle.

On the OCC supply side, although China is ranked as having a lower recovery rate of 60 percent for the grade, this is probably inaccurate because China is a net exporter of the boxes it makes. Likewise, the European and North American OCC recovery rates in the 70 percent range may be slightly overstated because those regions are net importers of boxes made in China and other parts of Asia.

Starting with street scavengers and office cleaning crews, few recycling opportunities seem to be missed in China. “China’s collection rate should be on par [with] or higher than U.S. and Europe factoring out the exported boxes,” says Wang of ACN. “The informal collection system that has been in place for many years has been improving. There are more and more collection and baling facilities in many cities.”

Even so, the nation’s central government says it plans to bolster China’s post-consumer recycling infrastructure as part of its 12th Five-Year Plan, which runs from 2012 through 2016.

Speakers from several government ministries told attendees of the 2011 Secondary Metals International Forum, held in Guangzhou in November and organized by the China Nonferrous Metals Industry Association Recycling Metal Branch (CMRA), that the comprehensive plan includes budgeted funds for capital investments.

“Providing more support to our secondary metals industry [and] environmental protection” is what CMRA vice president and secretary-general Wang Jiwei said he anticipates from the 12th Five-Year Plan.

Addressing forum attendees, Li Jing of China’s National Development and Reform Commission (NRDC) also commented that the new central government plan is designed to support “more production capacity” for the secondary nonferrous metals industry. This includes “special funds for pilot projects” for recycling-related ventures that help support the Circular Economy initiative being championed by Beijing, she indicated.

Bolstering technology innovations for metals producers and recyclers “is something that the Ministry of Science and Technology (MoST) is prioritizing,” said a speaker from that Chinese agency. “In the 12th Five-Year Plan, we are going to promote efficiency and research and development,” the MoST delegate commented. He referred to “low-pollution technology” that exists in other countries that will become more common in China if the plan is carried out.

A speaker representing China’s Ministry of Industry and Information Technology (MIIT) said recyclers could expect more vehicles and appliances to “enter the recycling stream” in the years ahead. He commented that the scrap metals from this supply will “improve industrial supply” for the secondary nonferrous metals industry in China.

Metals recyclers in other parts of the world will be keeping a close eye on how many of those old vehicles and appliances enter China’s recycling stream, as well as to what extent demolition activity in China begins to yield domestic scrap.

A major factor in China’s inability to supply itself with scrap during its rapid development has been the emergence of first-time automobile and appliance buyers. Many of the autos and appliances that have been replaced remain in operation with a second owner, so the scrappage rate is not yet considered to be high.

Inevitably, though, cars and washing machines that have been maintained by two or more owners can only delay their trip to a scrap yard, not cancel it.

Whether or not China’s metals consumption activity peaks in or near the year 2024 (as forecast), its ability to source more obsolete scrap by that same time seems inevitable.
 

Post-Boom Hangovers
Veteran scrap processors and traders have experienced the boom and bust cycle before, in some cases many times.

In their minds, the nature of the downward cycle to come is an object of curiosity at least as much as its timing.

Paper recyclers remember a very severe demand and price drop in 1995, when a frenzy of OCC buying by mills in Asia drove the price higher before that activity ceased abruptly.

In a review of scrap paper pricing prepared by Bill Moore for the March 2009 edition of Recycling Today, Moore noted, “Spot prices for OCC in the second quarter of 1995 reached more than $250 per ton. The market fell from its peak in May 1995 of more than $200 per ton to less than $50 per ton by September 1995.”

Such sudden and drastic downturns for any scrap material can cause financial pain for one or more links in the scrap materials supply chain.

In 2012, copper prices that continue to trade near historically high levels could carry the greatest potential for damage. Traders of copper scrap and other scrap materials are scrutinizing news accounts and government economic activity figures that can lend insight into China’s economic health. Since copper is traded on a continual basis at exchanges in Chicago, London and Shanghai, pricing for the red metal moves swiftly upon the release of all types of government statistical disclosures or corporate earnings reports.

News that China’s estimated annual GDP growth may slow somewhat in 2012, from 8 percent to 7.5 percent, provided one recent example.

At the National People’s Congress in Beijing in March, Chinese Premier Wen Jiaboa announced the GPD target reduction. According to a Reuters report, Wen said the reduction was appropriate “so that China’s economy can overcome its unbalanced, unsustainable and uncoordinated problems to step on a road focused on quality, which is also fundamentally positive for the world economy.”

Chinese metals production figures released in March did not seem to indicate that slower conditions have affected the nation’s steel industry. In February, Chinese steel mills churned out 1.926 million metric tons on a daily basis, up from 1.83 million metric tons in January. A Reuters report indicated mills were ramping up operations in anticipation of greater demand for steel in March and April.

And ACN’s Wang notes that even 7.5 percent growth is an impressive amount. “The projected 7.5 percent GDP growth for 2012 is about a $524 billion increase,” he comments. “In actual dollar amount, it is higher than the $469 billion increase back in 2009 at 9.2 percent GDP growth.”

But the speculation is likely to continue, and different scenarios will be imagined by traders, investors and business owners nearly every day.

In mid-March, copper pricing in Shanghai fell 0.7 percent, with a Reuters news report citing “indications of a weakening property market in China.”

If the weeks and months to follow match the existing pattern, the market will move back up and down in an irregular pattern, as investors and traders try to determine just when China’s ability to absorb commodities will begin to taper off.

The author is editorial director of Recycling Today and can be contacted at btaylor@gie.net.