Scrap Metals Supplement - Cold Snap

Optimism and energy have pulsed through China’s major cities throughout much of this decade, as the world’s largest nation has embraced capitalism as it enjoyed double-digit economic growth.

In the recycling industry, China became an enormous factor seemingly overnight. Throughout this decade, its steel mills, copper smelters, paper mills and plastics producers purchased secondary commodities in greater bulk one year after the other.

The forward momentum that had propelled China and the recycling industry for several years, however, came to a halt in the summer and fall of 2008.

At two scrap metal industry events held in two separate cities in China this November, the tone was similar. Concern was in the air, as was acknowledgement that the once overheated Chinese economy has been exposed to colder temperatures in the second half of 2008.

The China Nonferrous Metals Industry Association’s Recycling Metal Branch (CMRA) invited speakers from several Chinese metals industry sectors to its Nov. 7-9 event in Beijing.

Most of those invited had prepared presentations well ahead of the November event to meet a conference deadline. Since many of these presentations assumed continued growth in Chinese metals production for the remainder of 2008 and into 2009, many speakers offered revised comments once they reached the podium.

Zhang Tianjiao of Wukuang Star Futures Co. Ltd. was among the presenters who noted that his original presentation "was written before Sept. 15" and that he "did not predict such a dramatic or drastic drop" in metals demand or pricing.

Zhang noted that prices for many commodities during the past two years had been "unimaginable" thanks largely to heavy demand for materials from China.

Even though Zhang’s slides and comments were prepared several weeks before his November presentation, he was already warning of that the "lending crisis was spreading all over the world." He also noted that a stronger U.S. dollar could be a factor that could "increase the risks of metals price declines."

Zhang’s September slides indicated that copper scrap and concentrate was likely to remain in short supply. His November comments wavered from that viewpoint somewhat, but he still predicted that "prices of metal have already declined to the bottom or near bottom" and that the steepest drops had already occurred.

Presenter Yang Jun of the China Futures Co. Ltd. advised attendees to engage in hedging to guard against the worst impacts of price volatility. Yang said, "Do not expect the economy to recover quickly," adding that most "first quarter forecasts are over-optimistic."

Hedging on transactions, said Yang, is "a very simple idea," but that "very small and medium-sized enterprises do not understand this strategy." The primary benefit, he said, is eliminating risk exposure. "Don’t think you are smarter than the market," he warned attendees.

A presentation from Wang Biwen of the China Non-ferrous Metals Fabrication Industrial Association (CNFA) featured slides created in September that referred to the "exceptionally rapid" development of China’s wire and cable production industry. Wang tempered that language somewhat by commenting that as of November there was "too much inventory" left over from "a full market."

Although the presenters adjusted their comments to reflect the more subdued market, Zhang from Wukuang Star Futures advised attendees not to presume that the downturn was any more permanent than the bull market had been. "Do not listen to the predictions of others," he stated. "You need to keep a clear mind."

Points of view were exchanged, but little was settled when scrap traders from China, North America and Europe met at a session called for by the CMRA at its Beijing event.

At the CMRA’s "Trade Seminar for Recycling Metal Import & Export under the Global Financial Crisis," representatives from both the Institute of Scrap Recycling Industries Inc. (ISRI) and the Bureau of International Recycling (BIR) declared their disappointment and concern about the number of complaints they had received from their member companies about cancelled orders in China.

A Chinese scrap trader at the seminar suggested that many of the cancelled transactions occurred when shippers sent scrap to China through smaller brokers and agents as opposed to working directly with consumers. "Those people who haven’t kept their word are import-export agents," he commented. He also suggested that those sending scrap to China work directly with metal producers.

Robert Stein of Alter Trading, St. Louis, representing the BIR, replied, "It doesn’t matter how scrap finds its way; that’s no excuse for the actions that have been taken."

Several attendees suggested maintaining a list of disputed transactions and of the companies involved as a way to help avoid the continuation of such practices. Both Garino and Stein said, however, that such a practice would violate the confidentiality that ISRI and BIR promises to its members.

Regret was a commonly expressed sentiment. "It’s very unfortunate that, in some cases, the trust that has been built up over the course of a decade has evaporated in one month," said Stein.

The problem is not universal, many delegates also commented, and broad brushes should be avoided. "We have not cancelled one single contract," declared Tony Huang of aluminum producer Shanghai Sigma Metals. "We never re-negotiated and we haven’t missed a single payment." His long-term credibility and reliability, says Huang, allows him to pay less on average for scrap.

French scrap trader Marc Natan of Manco Consulting suggested using the BIR’s and ISRI’s arbitration services. Perhaps more knowledge of the arbitration process—as well as of risk management and contract law—could be distributed through printed materials or at events co-hosted by the CMRA in cooperation with the two groups, he suggested.

"It’s education," said Natan. "With this bigger market, we have had a lot of new metal companies and traders starting in the last few years, and they don’t always know what kinds of risks they are taking. We need to speak the same language: Not Chinese or English or French, but scrap."

Potentially better news came from Shanghai at the World Scrap Metal Congress, hosted by conference management firm Terrapinn Pte Ltd. in early November.

Orders from China for copper scrap have plummeted in late 2008, but a copper industry veteran from that nation said the long-term demand fundamentals were still in place.

Speaking at the World Scrap Metal Congress, Wang Ming of Zhejiang Hailiang Co. cited an analysis by Brook Hunt that in the next 13 years, "the average annual increase of copper consumption in China will be 7.4 percent."

Acknowledging current economic woes, Wang nonetheless predicted that "a setback will not influence copper consumption too much." He added, "The continuous developing economy of mainland China is urging the consumption of copper in industries like electric power, marine engineering, electric communications, automobiles, etc."

In the power sector, Wang remarked, "The overall investment in constructing and rebuilding of the national power line in the 11th five-year period will reach RMB1434 billion. "As the electric power industry occupies about 50 percent of the national copper consumption, [China’s] overall copper consumption will be driven by the rebuilding and newly established [grid] and will be increasing for a relatively long period."

The world’s copper scrap has been helping to fuel the growth. China has nearly tripled its consumption of copper scrap in five years. According to the Beijing China Non-ferrous Recycled Metal Research Institute, the volume jumped from 420,000 tons in 2003 to more than 1.1 million tons in 2007.

Scrap provides one-third of the feedstock tonnage for the copper that is eventually consumed in China, said Wang, who noted that the scrap is often processed at recycling parks in cities such as Ningbo, Nanhai and Jinghai. The scrap is melted in electro-refining facilities, casting facilities and brass mills.

Economic conditions in the rest of the world were having an impact on copper pricing, according to Wang. "Rebounding of the U.S. dollar and the gloomy future of the economy in America and Europe has resulted in the recent crash of commodity prices," he commented.

He predicted, though, that "the high copper price will get back in a short time." Although orders declined dramatically in the fall of 2008, Wang said buyers would be back. "We think that for the long term, the demand is [solid], once the price of the vendor and the buyer could be balanced, the demand will be released," he stated.

For several decades, Scott Newell has helped install scrap shredding equipment to recyclers around the world. China has now joined the roster of nations where Newell is spending his time.

Newell, chairman of The Shredder Co. LLC, Canutillo, Texas, described one noteworthy installation for the Fenglin Group in Xuzhou, China, to attendees of the World Scrap Metal Congress.

The 10,000-horsepower, 124-inch mill is "capable of processing more than 1 million tons of shredded scrap per year," Newell said.

The shredding plant sits on nearly 100 acres of 10-inch-thick concrete and is served by 17 truck scales and 35 hydraulic scrap-handling cranes. Side-by-side split downstream systems help capture nonferrous metal.

Newell said he was aware that some skeptics had questioned whether enough obsolete scrap would be generated in that region of the country, but he said he saw "3,000 to 4,000 tons waiting to be shredded" at the site.

Auto bodies and appliances were not what arrived, Newell said, but rather loose manufacturing scrap and scrap from demolition and construction sites as well as other forms of scrap from peddlers and small recycling companies were among the material awaiting shredding.

In every country, Newell said, shredded material would be in demand. "The introduction of shredded steel scrap into electric furnaces is very popular all around the world," he said.

Newell cited the high density of the grade as a furnace charge and its ability to allow electrodes in to do their work without breakage as important reasons. "The experience of North American steel scrap utilization indicates that a much higher percentage of the world’s total scrap supply in the future will be shredded as compared to sheared or baled," he said.

Makers of shredding equipment such as The Shredder Co. must like that possibility, since just 20 percent of ferrous scrap melted in Europe is shredded, while only 11 percent of the scrap consumed in Japan is shredded, compared to more than 35 percent in the United States.

Although a cold front has moved through the once red-hot Chinese economy, recyclers and equipment providers to the industry alike are likely to remain attuned to the world’s largest emerging economy for signs that it is once again consuming secondary commodities on a pace similar to what was occurring earlier this decade.