$10 million of nonferrous scrap is stolen from U.S. exports to China each year, ISRI research reveals. Exporters hope the research will help build international cooperation to address the problem, but they’re also taking steps to reduce their risk.
By Rachel H. Pollack
It took two thefts totaling $50,000 for one West Coast scrap exporter to fully appreciate the risks of exporting nonferrous scrap to China. The first hit was a container of brass in 2013, the company president says. “We literally lost two Gaylords out of a 20-foot container, 4,000 to 5,000 pounds each. When the container arrived in China, the last two boxes were missing and the bolt seal was intact.”
The company started to investigate better sealing practices, but before it could act, it was hit again—this time for copper. The thieves moved a two-by-two stack of Gaylord boxes at the back of the container, removed two boxes from the second row, and put the two-by-two stack back in place, the president says. To someone first opening the container, “everything looked like normal.”
Reports of thefts such as these started picking up in the late 2000s. ISRI’s Trade Committee members heard that small quantities of primarily nonferrous scrap were being removed from shipping containers en route to China. In most cases, the locks and seals on the shipping containers remained intact. It was “becoming hard to detect there was even an intrusion,” says Randy Goodman, executive vice president of the Atlanta-based nonferrous export firm Greenland (America), who chaired a Shipping Container Theft Subcommittee. Methods to defeat shipping container seals were becoming well known, he says; videos on YouTube showed how to do so without detection.
Metal Exchange Corp. (St. Louis) first noticed the problem in 2009, says Mark Malloy, vice president and director of logistics, and a member of the subcommittee. It was experiencing “consistent weight shortages into South China ports particularly,” he says. The crime often is not discovered until the buyer weighs the container and finds a discrepancy between the stated weight and current weight. Because “containers bounce around South China with very little control,” the company could not establish where, when, or how the thefts were taking place. As it investigated further, it discovered it was not alone. “Other major exporters were having similar issues,” he says.
As copper prices rose from 2009 to 2014, the problem seemed to grow, Goodman says. Exporters were reporting thefts of up to 15 percent of the container’s contents. If that container held 45,000 pounds of copper at $2 a pound, he points out, that’s $13,500 in missing material—enough to wipe out a scrap broker’s profit from that shipment. “Something like that is not a deal-killer,” he says, “it’s a business-killer.”
For brokers, “margins are already pretty thin. Even a 2-, 3-, or 5-percent loss is considerable,” says Eric Harris, ISRI’s assistant vice president of government relations and international affairs. At the same time, demand for copper in China at the time was still high enough that sellers were unwilling to stop selling to that market and “just send it somewhere else.”
The victims of these thefts started to compare notes and form theories about how the thefts were taking place, but no one had “enough credible data to really make any lasting conclusions,” Harris says. Thus, the Trade Committee directed ISRI to survey scrap exporters to learn the extent of the cargo theft problem as a first step toward addressing it.
Pinpointing the Problem
In 2014, ISRI devised a confidential survey of members who export nonferrous metals to China, asking them to report their losses due to theft “from containers in transit or in customs at ports in China between 2011 and 2013.” A hint of exporters’ frustration comes through in the letter that accompanied the survey. The ISRI Trade Committee initiated the project, the letter says, in the hope that the collected data “will be significant enough to get the attention of some department or agency in the federal government that will then stand up and assist ISRI members in combatting these ridiculous losses.”
To ensure confidentiality and compliance with antitrust laws, ISRI hired the law firm Venable (Washington, D.C.) to send out the survey and aggregate the results, which had to meet certain criteria: At least five members had to respond, and no one member could provide more than 25 percent of the data, for example.
The survey asked participants to provide specific details about their export theft experiences: the shipping date, claim date, claim amount, scrap grade, weight of the missing material, steamship line, origin of shipment, rail ramp, port of loading, transshipment port, and destination port. It took some time and “significant effort” for companies to compile that information, Goodman says, which might have been one reason responses were fewer than the Trade Committee had hoped. Committee members also reached out by phone to those invited to participate. It was frustrating, Goodman says, that “some of the people that screamed the loudest that we’re being hurt weren’t willing to do the work to prove it.” Other Trade Committee members expressed similar frustrations. Ultimately, 15 percent of those invited to participate in the survey did so—18 member companies out of 117 surveyed. They reported 548 incidents of suspected theft in the three-year period. The respondents were a good mix of large, medium, and small exporters, Harris says.
Venable aggregated the results, and the firm solicited Goodman’s help to understand the data and put them in context for a survey report ISRI released in April 2015. The survey confirmed that scrap theft from shipping containers exported to China is a growing and industrywide problem, but it’s largely confined to specific ports in South China.
The total number of reported thefts more than tripled in the reporting period, from 92 in 2011 to 330 in 2013. If the theft problem had continued to grow at that rate, the industry would be experiencing 2,000 thefts this year. The amount of material reported stolen doubled, from 338,363 pounds in 2011 to 680,871 pounds in 2013. A total of 1.42 million pounds of nonferrous scrap were reported stolen in the three-year period, valued at $2.04 million. The average theft in 2013 was valued at $2,860, which was consistent with anecdotal reports of these thefts being small amounts from any one container.
That’s just the reported thefts. ISRI Chief Economist and Director of Commodities Joe Pickard extrapolated from the survey data, official trade statistics, and a review of more than 10,000 recorded copper and copper alloy scrap shipments to China to conclude thieves are stealing at least $10 million of scrap aluminum and copper being exported from the United States to China each year.
As many suspected, high-value nonferrous scrap was reported stolen most often. By weight, the largest commodity grade reported stolen in 2013 was shredded mixed nonferrous (Zorba), with losses of 191,833 pounds—28 percent of the total—valued at about $158,000. Other common targets, based on the number of incidents reported, were No. 2 copper wire (Birch), 26 thefts, and aluminum copper radiators (Talk), 10 thefts. Other grades of copper, brass, aluminum, stainless steel, and mixed metals also were reported stolen. The thefts occurred when the containers were being transported by 18 different steamship lines, according to the 2013 data, with CMA hit most often (154 thefts), followed by Maersk (31), Mediterranean Shipping Co. (29), and Hyundai (25).
Perhaps the most valuable data the survey collected was the location of the thefts. It asked for detailed information about steamship lines and destination ports of shipments that experienced thefts in 2013. With that input, the researchers could “look at the data and connect the dots … to isolate the location in China that [puts scrap cargo] most at risk,” Harris says. Nearly three-quarters of the thefts reported in 2013 were from scrap containers that entered China through ports around Hong Kong and Shanghai. Of the 330 reported thefts that year, 208 (63 percent) were from shipments that first arrived in Hong Kong and 32 (10 percent) from shipments to Shanghai.
The report explains that Hong Kong is where containers of scrap get transshipped: They are transferred from huge container ships to smaller barges for delivery up the Pearl River to ports in Guangdong province, including Sihui/Mafang, Zhaoqing, Sanshui, Wuzhou, and Nanhai. About 10 percent of all U.S. scrap copper exports—worth about $290 million—traveled that route in 2013, and 60 percent of the reported thefts that year were from shipments that had those five ports as their final destination. Sihui/Mafang alone was the final destination of about 40 percent of shipments that had thefts reported in 2013; Zhaoqing was the final destination for another 11 percent. Overall, exporters reported thefts from shipments that arrived at 21 different final-destination ports in China in 2013. Extrapolating from survey data and export shipment data, Pickard estimates that 3 to 5 percent of all copper scrap container shipments to Pearl River Delta ports are at risk of cargo theft.
How are these thefts occurring? “The crux of [the problem] is the transload ports,” Goodman says, where the containers move off the overseas vessel and onto a river vessel. A container might sit for several days in a container yard or a warehouse, and the shipper has no idea of what security these facilities have, if any. “There’s a large gray area” around what happens when cargo gets transferred from ocean vessel to river vessel, Goodman says. The problem also could be at the final-destination port, he adds, for the same reason: It’s unclear what security the containers have while waiting to clear customs.
This is not the work of a few people with crowbars and wheelbarrows. The nature of what gets removed and how indicates this is an organized effort of people with access to forklifts, trucks, and other equipment. “The containers are being offloaded” from the barges, the West Coast exporter says, “and forklifts are used to open them up, unload, and close them on a commercial scale.” The thieves seem to have knowledge of the containers’ contents, he adds. “How do they know to pick on the containers that are high-value? I’ve never had a cheap container attacked.” David Cuckney, manager of the International Maritime Bureau (London)—part of the International Chamber of Commerce’s Commercial Crime Services—put it more bluntly: “We strongly believe vessel agents, port agents, carrier agents are being bribed,” he said at a session on cargo theft at the 2015 ISRI convention in Vancouver, British Columbia.
“The survey proved a lot of what we thought we knew, but we needed the data to back it up,” Goodman says. With that data in hand, the Shipping Container Theft Subcommittee and ISRI staff members put together a list of recommendations for scrap exporters, carriers and ports, government agencies, and ISRI to minimize the likelihood of theft and to seek ways to address this problem.
ISRI began to disseminate the survey report and recommendations last spring. It sent the report to the companies invited to participate in the survey and to Trade Committee members; it further publicized the findings through the Leadership Update e-newsletter and a press release. (For a copy of the report, go to www.isri.org and search “cargo theft.”) The survey results and the larger topic of cargo theft also were addressed at the abovementioned session at the 2015 convention that featured Goodman, Cuckney, and Keith Lewis, vice president for operations at CargoNet (Jersey City, N.J.).
Getting Government Attention
The importance of the survey report became clear in ISRI’s subsequent interactions with two U.S. government agencies. The Federal Bureau of Investigation contacted ISRI seeking information on cargo theft a few months after the report came out, says Brady Mills, ISRI’s director of law enforcement outreach. He provided a copy of the report, and in October 2015, an FBI field office issued an intelligence bulletin on the issue of theft from intermodal containers of scrap that largely echoes the ISRI report’s conclusions. This is the first bulletin the U.S. intelligence community has issued on the subject, the bulletin notes, and it will serve as a baseline for further reporting on the issue. The bureau sends such bulletins to all field offices worldwide, intelligence agencies, and state, local, and tribal law enforcement agencies.
The FBI intelligence bulletin largely accepts the ISRI survey report’s assessment that copper scrap is being stolen from intermodal cargo containers while in transit through seaports in Hong Kong and South China. It echoes ISRI’s conclusion that these thefts are almost certainly the result of organized criminal activities that involve insiders at Chinese maritime terminals who know the contents of specific containers. It cites the ISRI report’s estimate that such thefts total at least $5 million worth of U.S. copper scrap annually. The FBI says it would like to see more evidence or corroboration of such thefts.
The bulletin agrees with U.S. exporters’ assertion that these thefts are unlikely to be crimes of opportunity because small-time crooks would not have information about the contents of the containers or the resources to divert the containers and remove the quantities reported stolen without leaving evidence of the crimes. It also repeats U.S. exporters’ concerns that, in the long term, these thefts could affect trading relationships between U.S. recycling businesses and their customers in China and Hong Kong, as well as the overall economic vitality of the United States. It doesn’t expect the situation to change unless law enforcement authorities intervene, but there’s no information about efforts such authorities might have undertaken to date.
The bulletin cited several sources in addition to ISRI’s survey report, most notably a press release from the International Maritime Bureau on its survey of Bureau of International Recycling (Brussels) members (see “A Global Effort,” below), Chinese news reports, and recycling industry media reports of sessions at the spring 2012 BIR convention and 2015 ISRI convention.
In a letter to Mills, the FBI thanked ISRI for providing the survey results, calling them “crucial to our understanding of the issue” and to the production of the intelligence bulletin. The FBI report makes people know the scrap recycling industry is “a major-league, viable industry,” says Jim Wiseman, vice president of Smart Recycling Management (Nicholasville, Ky.) and co-chair of the Trade Committee for the last two years. It “acknowledged the significant problem and who is being harmed by this.”
ISRI’s outreach to the State Department also has had results. Mills and Harris met with staff of its Overseas Security Advisory Council, a joint business–government initiative that helps the department develop programs to protect U.S. private-sector interests worldwide. OSAC has since invited ISRI to join its Maritime Security Working Group. Many major companies are members, Mills says, so ISRI can find out if any of them have similar problems when shipping to the Far East. He and Harris plan to attend the MSWG meeting this September.
For both the FBI and the State Department, awareness of this issue is key, Mills says. “I think there’s going to be a continuing relationship” between ISRI and both entities, he adds. He hopes OSAC will draft its own report on the scrap cargo theft problem.
The Shipping Lines’ Role
Goodman hopes the FBI bulletin will help the scrap industry get more traction addressing the issue with the shipping lines and the entities that regulate them. The shipping lines should be “responsible for maintaining the security and integrity of that material” in a shipping container while it’s in transit, he says. This problem is “happening on their watch, in my opinion, and if it’s not, they should be able to prove it.”
The shipping lines’ attitude is, “Sorry, not our fault,” and they ignore the problem, says Andy Wahl, president of TAV Holdings (Atlanta) and co-chair of the Trade Committee for the last two years. The “mind-numbing verbiage” on the back of an international bill of lading absolves them of any legal liability for the cargo they carry, Goodman says. This lack of accountability has been a huge frustration for scrap shippers. The relationship is completely one-sided, Malloy points out. Shippers have to provide “significant transparency” regarding the specific cargo, its weight, its value, the importer, and the destination. With “all that information flowing through so many hands, the [wrong] person could find out what’s in the container and act on it,” he says—targeting high-value cargo for theft. But the shipping lines are silent on how they select transshipment ports and secondary shippers or what ports and subcontractors handled a particular container. “The steamship lines’ opaque operations at [the transshipment] ports, the use of second-leg carriers after transshipment, and the significant limitation on carrier liability” are complicating trade in that region, according to one scrap shipper who wrote to ISRI about this problem.
For any one scrap exporter, even a large one, asking for information or help from the shipping lines can feel like David facing Goliath, Malloy and Wahl say. Although overcapacity and the slower global economy have taken their toll on the containerized shipping industry, the shipping lines are still massive companies with seemingly unlimited power over what cargo gets on what ship and when it’s delivered. Exporters worry about retribution against any company that complains about their practices. “We don’t want to alienate the shipping lines,” the West Coast exporter says, because the risk is they’ll refuse to carry your cargo. Still, scrap recycling needs “more respect as an industry” from the steamship lines, Malloy says, and “acknowledgement there’s an issue, [there are] holes in their operation that need to be addressed.” The ISRI survey report recommends that shipping lines and ports increase their security when loading, discharging, or warehousing containers; monitor employees and agents for links to reported thefts; and exert more control over feeder lines to “ensure the timing and delivery of all containers to clients.”
Goodman agrees the shipping lines must take ownership of this issue for there to be any progress. They have the “deep pockets to figure out where [and] how this is happening.” But he likens the problem to that of auto manufacturers and mercury switches or kill switches for air bags. “There’s no impetus for [the carmakers] to go down that path and spend that money” unless they feel pressure from regulators or public opinion. The same is true for shipping lines, he says. Right now, they don’t care about scrap cargo theft so long as they get their container back, he says.
Seeking Help Inside China
Criminals in China are likely the source of this problem, but Chinese scrap consumers and government bodies could be part of the solution, exporters say. “Consumers in [affected] regions will need to take action to put pressure on all parties involved in the clearing, inspection, and transportation of our goods so that our products can be securely delivered without fear of theft,” wrote Robert Stein, then senior vice president of Alter Trading Corp. (St. Louis), in comments to ISRI on the theft issue. (Stein retired at the end of 2015.) Wahl agrees that it would help “to have Chinese consumers team up with us and also participate in our quest to talk to the shipping lines and everybody” who might play a role in fighting cargo theft.
“If ISRI could have the Chinese authorities look into it in a serious way, it would be a benefit to all people who ship to China,” Goodman suggests. Indeed, ISRI would like “the Chinese government to recognize this is a problem and take steps to improve cargo security once material makes it to their ports,” Harris says. “We want the Chinese ports to play by the same rules as all the other ports in the world.”
But others think Chinese government action is unlikely. Organized crime has had a foothold in Hong Kong for at least a century, one scrap industry observer points out, and smuggling and related illegal activity have deep ties there. The Chinese government and the port authorities have much bigger cargo security issues than scrap, he says, such as illegal drugs. “If they’re letting crystal meth get through, [scrap theft] is not going to be the priority.”
A Global Effort
U.S. scrap exporters are not the only ones experiencing thefts from shipments to South China. The issue has come up at meetings of BIR’s International Trade Committee and Non-Ferrous Metals Division for several years, leading BIR to seek the assistance of IMB, the unit of the International Chamber of Commerce tasked with acting “as a focal point in the fight against all types of maritime crime and malpractice.” Among its services are investigations and reports on cargo theft.
Like ISRI, BIR is finding it difficult to collect data on the cargo theft issue. In an October 2012 press release, it asked BIR member companies to send reports of fraud and theft from containers, with supporting documentation, to IMB at email@example.com or 44/20-7423-6960. There is no charge to do so, and the information will remain confidential, says Alexandre Delacoux, BIR’s director general. “The timely sharing of such information has been extremely effective in reducing risk in other membership sectors of the IMB,” the press release stated. IMB verifies and records each incident and provides details of the theft (without identifying the victim) to BIR members.
After hearing more anecdotal reports of cargo losses due to theft, BIR issued another press release in January 2013, again urging its members to report incidents to IMB to “help define the scale of the problem and identify possible trends/similarities. This pooled information could well reveal a much larger criminal activity that then could not be easily ignored by the authorities.” It repeated the call for information in August 2013, adding that “once a critical mass of information has been reached, the IMB can analyze the data and provide some meaningful assistance to industry in combating the problem.” But to date IMB has received very few reports, Delacoux says, thus it does not have enough information to come to any conclusions about scrap cargo theft. He wonders whether exporting companies don’t want to “expose themselves” or if they are not aware the information they provide will remain confidential.
BIR also surveyed its member companies directly about cargo theft, but the response rate was not sufficient to draw valid results from the data, Delacoux says. It opened the survey up to its 37 national association members in an effort to get more data, he adds, but ISRI is the only association that responded.
BIR’s agreement with IMB lets its members request information for free about theft and fraud at specific ports, although the information IMB can provide is not specific to the scrap industry, Delacoux says. IMB has indicated the problem of theft and fraud at ports in South China goes beyond the scrap industry, he says, “and it has been going on for quite some time. … It shows how much our operators need to know [their] ports.” BIR members also can ask IMB for information about counterparties. Any report they receive would be sanitized, he says, but it might “help to provide a degree of confidence over an unknown company by showing their past trading activities.”
ISRI has been in discussions with BIR to collaborate further on the cargo theft issue, Harris says, and it is considering partnering with BIR to give ISRI members the same free access to IMB’s research on ports and counterparties. (To use those services now, which the ISRI survey report recommends, go to icc-ccs.org/icc/imb.) Harris also urges ISRI members to report incidents of cargo theft to IMB. It could become the vehicle for an “ongoing effort” on data collection and reporting on this issue, he suggests.
Delacoux suggests a next step might be for BIR and national associations together to go to the shipping lines and ask them to work with the scrap industry to address cargo theft. “It’s necessary for several actors to come together—the shipping lines, the insurance companies, the recyclers themselves—to collaborate.”
Scrap exporters are not waiting for action from ISRI, BIR, or the U.S. or Chinese governments to address the scrap cargo theft problem. To reduce their risk, they’re changing their shipping practices, taking steps the survey report recommends.
First and foremost, they’re investing in better container security. The West Coast exporter jokes that he now buys container seals by the case. His average sealing cost—which comes out of his profit—is $80 to $100 per container for a bar lock, traditional door seals, plus tape seals. “That’s protecting us from losing $10,000 to $14,000 per container,” he says, making those costs “easy insurance.” Further, “now we only ship containers to China that have a floor bolt,” he says. With that mechanism, “you can’t lift those doors, bar lock, and seal them.”
The greater security also “gives us evidence,” he says. “You can’t open a door now without [seeing] multiple levels of evidence of an intrusion.” Along those lines, he has modified his software to track all five container seals on the bill of lading or other documentation. That was a lesson he learned from the second big loss he suffered, he says: The thieves broke one of the seals, but that seal was not listed on the bill of lading.
More security means a higher cost, however. “In a high-volume business where margins are slim, the answer can’t just be more cost to the shipper,” Harris says. But “who doesn’t want to pay 7, 8, 50 bucks to secure a load that might be $40,000 or $50,000?” Wiseman asks. “It’s a small investment to do your part,” to show you “tried to mitigate the chance of [the container] being stolen or broken into.” And security measures come at various price points, Goodman points out, starting at the low end with security tape across the doors. “If [the container] arrives and the tape is broken, it’s been tampered with.”
Another protective measure exporters can take is to change the terms of sale to put more responsibility on the buyer for cargo while it’s in transit. The ISRI survey report suggests shipping metals to China “free alongside” (in Incoterms language, FAS), which means the buyer pays for the metal up front, or “cost, insurance, and freight” (CIF), which means the seller pays the cost for delivering the freight to the destination port and the insurance, but the buyer assumes the risk once the goods are loaded on the vessel. Such terms also have a cost, however, exporters say. “I could be selfish and say, ‘I sell metals; once it leaves the U.S. port, I’m not responsible,’” Wahl says, “but people I sell to have to factor that in when they buy metal.”
The report also recommends shippers “use the most direct route from point of origin to customer as possible” and “consider the risks of cargo theft before exporting to China, particularly to customers located in Hong Kong or the Pearl River Delta.” The industry observer puts it more bluntly: To reduce the risk of theft, he says, don’t ship through Hong Kong. “If you’re consolidating various cargoes, or if you’re transshipping, you have no choice. But if you’re shipping a full container to a single destination, then try to ship to a mainland port such as Shenzhen.”
A different route or destination is not always possible, exporters say. “We have containers in our yard every day going to these destinations” in South China, the West Coast exporter says. “Everything has to transit through the Hong Kong port. It’s where the products we ship are going.” And some exporters don’t like the idea of crime limiting their market. “We do not view this as a proper solution,” one member wrote to ISRI. “Limiting trade because of criminal activity negatively impacts both the Chinese consumers and their international suppliers.” Malloy agrees. “We shouldn’t shy away from our No. 1 trade partner” due to theft, he says. “It’s an issue.” Goodman even wonders about antitrust issues if recyclers stop selling to certain Chinese buyers or stop using those specific ports.
A Dynamic Problem
Anecdotally, reports of scrap cargo theft seem to have fallen in the past two years. Most recyclers attribute this largely to lower copper prices and less Chinese demand for scrap. Better cargo-security measures—and exporters changing where they ship their scrap—could be having an impact, too. That said, “it’s still an ongoing issue,” Wahl says. “It hasn’t disappeared. Companies selling to those markets have found ways to protect themselves.”
But other dynamics at work within China are changing the flow of imported scrap, Goodman says. Scrap-consuming industries have consolidated and relocated, and the majority of imported copper and brass scrap is not going into southern China anymore. It has moved north by hundreds of kilometers in the past couple of years, he says. U.S. copper and brass scrap used to go to Chinese scrapyards for sorting and cleaning before going to a smelter, Goodman explains. Now the smelters buy material directly from exporters, and the Chinese government “is shutting down the little guys”—the scrapyards that used to do the preparation.
Wahl adds that for years, Hong Kong “was the port everything went through as a transshipment port, but the Chinese government has developed other ports [and there are] more direct shipments.” Fewer shipments going through Hong Kong could also mean less transshipment, which might be why thefts seem to be going down, he suggests.
The situation could change again—for the worse. If business picks up again in South China, scrap exporters will increase their shipments there. “All it will take is higher prices, and [the theft problem] will crop up again,” Goodman says. He surmises thieves might find a different product to target next time, such as aluminum copper radiators, which still are in demand in that region. (Although, he points out, they’d need to steal twice as much to get the same value.) Malloy cautions that “when the market turns around,” exporters must “be just as disciplined.”
Like domestic metals theft, cargo theft will never go away completely, Harris and others say. Scrap shippers “can mitigate it, they can make informed decisions, [and] have theft prevention measures, Harris says, but [they] can’t eliminate it.”
Rachel H. Pollack is editor-in-chief of Scrap.