January/Febraury 2009
International scrap traders tried to make sense of the recent market downturn and vexing contract disputes at last fall's CMRA conference in Beijing, which resolved few grievances but provided valuable dialogue and data nonetheless.
By Adam Minter
What a difference a year can make. In November 2007, the international metal markets were flush, and the 1,300 attendees at the Seventh International Metal Recycling Forum in Guangzhou, China, enjoyed a gathering of unprecedented opulence, including a lavish opening-night dinner complete with a multi-act stage show. Exporters with scrap to sell—or even access to scrap—were courted, wined and dined, and treated like visiting dignitaries.
Twelve months later, the markets were in a historic swoon, and the Eighth International Metal Recycling Forum, held in Beijing by the China Nonferrous Metals Industry Association's metal recycling branch (CMRA), convened in an atmosphere of thrift and gloomy mistrust. Roughly 600 delegates attended the event, a much-reduced number due to the near total cessation of scrap transactions and reports that in late October a British scrap trader allegedly was abducted and ransomed by a state-owned scrap trading company in Ningbo. The forum also suffered from lower attendance by Chinese scrap consumers, some of whom allegedly were reneging on contracts for scrap that had declined as much as 80 percent in value in the previous eight weeks. Many of these consumers decided to pass on the Beijing event to avoid running into their suppliers. As if to add to the gloom, the price of Shanghai copper declined to a three-year low Nov. 6, one day before the conference opened.
The market disarray figured in nearly every aspect of the forum. For example, one of the mainstays of the event—the informal trading floor that spreads out from the conference hall into the exhibition areas—materialized only for a specialized product never before sold at CMRA events: "distressed" shipping containers left at port by Chinese consumers who had canceled contracts with their overseas suppliers.
Yet, in the midst of all the bad news, the forum still managed to offer presentations containing unmatched insights into the Chinese secondary nonferrous industry. Though that industry has mostly gone dormant, nearly everyone agreed that it will recover, along with the markets in the developed countries that are so crucial to supplying it.
China by the Numbers
This year, as in past years, the forum opened with a speech on the state of the Chinese nonferrous industry. Wang Gongmin, CMRA's president, traditionally delivers this address, but this year Shang Fushan, Wang's successor at CMRA, had the honor. It turned out that Wang, who still attended the conference, had retired, to the surprise of many.
In any event, Shang's state of the industry talk began with a focus on the nonferrous market in the first eight months of the year—that is, before the world economic crisis torpedoed prices. According to his figures, total Chinese copper output in that period was 4.83 million mt, up about 21 percent, and its aluminum production was 9.46 million mt, up 36 percent, compared with the same period in 2007. China's output of secondary nonferrous metal in the first three quarters of 2008 was 4.3 million mt, up almost 9 percent from the similar 2007 period. Of that secondary metal total, copper production reached 1.65 million mt, up roughly 6 percent; aluminum output was 2.2 million mt, up 10 percent; and lead totaled 380,000 mt, up almost 19 percent. As in past years, other speakers offered statistics that diverged marginally to dramatically from CMRA's figures, but the association's numbers are generally the most widely accepted and used in China.
As usual, imported nonferrous scrap fed much of China's secondary nonferrous production. In the first eight months of 2008, China imported 5.38 million mt of nonferrous scrap, an increase of 11 percent over the same period in 2007, Shang reported. Of that import total, copper-bearing scrap accounted for 3.92 million mt (up 12 percent) and aluminum was 1.45 million mt (up 11 percent). Almost all of the imported material—92 percent—came through the provinces of Guangdong, Zhejiang (the cities of Taizhou and Ningbo in particular), and Tianjin. The top suppliers of copper scrap to China included Japan, Spain, and the United States, he said. Leading aluminum scrap suppliers included the latter two nations as well as Australia.
Shang also provided detailed statistics on domestic recycling volumes, noting that, in the first nine months of 2008, China recycled 640,000 mt of its own copper scrap (up 14 percent); 850,000 mt of domestic aluminum scrap (up 13 percent); and 380,000 mt of its lead scrap (up 19 percent). Due to the disorganized state of China's domestic recycling systems and programs, however, these figures should be considered rough estimates, at best.
In his speech, Shang dwelled on the six-year history of China's integrated recycling park concept, pointing out that the first five parks—in Taizhou, Ningbo, Tianjin, Taicang, and Quantong—now handle 40 percent to 50 percent of China's total imported scrap metal volume. Five additional parks—in Yantai, Wen'an, Zhaoqing, Jiangmen, and Wuzhou—are under construction and should be operational soon, further consolidating the Chinese scrap industry and the government regulatory control of it.
Nevertheless, all is not well, Shang said, pointing to China's relatively low volume of secondary metal consumption as the most serious problem. Currently, secondary copper only accounts for 29 percent of China's copper consumption, and secondary aluminum accounts for 23 percent of its aluminum consumption—well below the percentages of developed countries.
Several additional presenters fleshed out previously undocumented or misunderstood aspects of China's secondary nonferrous industry. For example, Li Hongwei of Chongqing Sigma Non-ferrous Metal Co. (Chongqing, China), a division of Shanghai Sigma Metals, China's largest importer of aluminum scrap, addressed the common misperception that China is the "world's supply base for regenerated aluminum." According to Li's figures, China exported 390,000 mt of secondary aluminum alloy in the first half of 2008. Of that total, Japan—the leading buyer of Chinese secondary aluminum—imported 90,000 mt but purchased 680,000 mt from other countries. "Chinese aluminum accounted for a mere 13 percent of the Japanese market," Li said. Overall, China's secondary aluminum accounted for only 3 percent of total global consumption of that commodity, Li's figures indicated.
Turning to copper, Wang Biwen of the copper department at the China Nonferrous Metals Fabrication Industry Association (Beijing) described the relationship between the scrap copper trade and the development of China's wire and cable industry. In 2007, China's 3.29 million mt of wire and cable production represented about 27 percent of the global total, while its consumption of wire and cable totaled 3.6 million mt, almost 30 percent of world demand.
China's wire and cable production can be divided into two categories: On the primitive side, about 200 production lines produced an estimated 1 million mt of oxygen-free copper wire rod in 2007 for copper wire, bars, and coaxial cable, Wang said. The larger, more advanced side of the industry features 181 continuous casting and rolling plants that produced roughly 6.6 million mt of low-oxygen copper wire rod in 2007.
Despite having a leading role in wire and cable production, China is using only 47 percent of its estimated capacity, leading to over-competition and problems with quality, Wang said. For example, he explained, all of China's companies that make low-oxygen bright copper wire rod from recycled copper failed to meet the lowest copper content standards for copper wire rod, resulting in reduced electrical conductivity and increased resistance in their products. Wang blamed this situation on the use of "unqualified" grades of copper scrap, unintentional mixing with other materials, and "incomplete oxidation and de-oxidation." He also noted the widespread use of "imperfect" casting and rolling techniques, as well as "untidy" production environments.
Chen Yang of the Engineering Research Center for Hazardous Waste Disposal (Beijing), a division of the Ministry of Environmental Protection, provided insights into the structure and development of China's secondary lead industry. Though China has been the world's fastest-growing lead producer since the 1990s, it produces only 30 percent of its lead from recycled resources, he reported. The secondary lead industry is now a national priority, however, and it is expected to produce 700,000 mt in 2010—a dramatic increase from its secondary lead production of 450,000 mt in 2007 and 380,000 mt in 2008.
Though China undoubtedly imports lead scrap—directly and as a component of e-scrap and other materials—such imports are illegal and mostly uncountable. Thus, Chen focused on domestic sources of lead scrap. Of the 70,000 mt of domestic lead scrap that China collects annually, used lead-acid batteries account for 71 percent of that tonnage, lead scrap from the production of lead-acid batteries adds another 14 percent, and other industrial and commercial sources contribute 9 percent. An additional 5 percent comes from miscellaneous sources, including printing and publishing.
According to Chen, roughly 200 Chinese secondary lead smelters rely on lead-acid batteries as a primary feedstock, with annual production ranging from "scores of tons to a thousand tons." In his view, the smelters share these characteristics: "small scale, high energy consumption, serious pollution, backward technology, and a low metal recycling and utilization rate." Generally, Chinese lead smelters process batteries manually, he said. Most of the plants use primitive technology, and more than 90 percent don't handle their emissions or wastes properly, leading Chen to conclude that "the overall standard is equal to international levels in the 1960s."
A Legislative and Regulatory Push
Though the freefall in international scrap markets monopolized industry news in the second half of 2008, other important developments happened behind that furor, with the Chinese government passing several new laws and regulations and refining some old ones. These legal changes will have, individually and collectively, a far more profound effect in the long term on the Chinese scrap business—and the international traders connected to it—than the market's short- to medium-term disruptions.
The two changes that promise to have the most dramatic effects are the long-awaited Circular Economy Promotion Law and a new set of regulations on the handling of e-scrap in China. The former focuses largely on sustainable development, which China refers to with the term circular economy. The latter, with its strong emphasis on producer responsibility, design for recycling, and subsidies for technical and environmental solutions to the e-scrap problem, is closely related to the much broader Circular Economy law. In any event, e-scrap was not a subject at the CMRA event, while the Circular Economy law was.
Sun Youhai of the National Advisory Council on the Environment (Beijing), author of the Circular Economy Promotion Law, noted that the law aims to improve the efficiency of China's use of resources, with the goal of using minimal resources to "create the greatest possible economic benefits and to best meet the demand." The law, enacted Jan. 1, 2009, provides few specifics on how China can achieve such efficiencies; instead it outlines principles that will be interpreted later. Such specifics will be enacted and enforced, Sun and other speakers asserted. China also will implement incentives—including tax benefits and subsidies—to achieve the law's resource savings and recycling goals.
Much remains to be determined in this crucial law. For instance, an administrative department under the State Council has the task of identifying the products and packages subject to compulsory recycling, without a date for meeting that goal. The same department must create performance evaluation indicators with the statistics department, the environmental protection department, and other departments under the State Council. For scrap industry participants, the law's most important component is a mandate for China to expand its recycling park program. An additional provision requires government entities above the county level to establish facilities for sorting and recycling domestic scrap. "This is landmark legislation for China's economy and environment, and it will be watched very carefully," Sun stated.
One sign indicated the new law's importance to the national government and the integration of recycling and reuse into the Chinese economy. Meng Xiaowei of the commercial services department in the Ministry of Commerce announced that the ministry is working to integrate statistics about the nonferrous metal industry into the country's economic figures. Currently, the industry is excluded from China's statistical portrait.
For scrap shippers, Hao Yilei of the General Administration of Quality Supervision, Inspection, and Quarantine offered perhaps the most important speech at the forum. In his opinion, the quality of scrap shipments improved steadily in 2008, with fewer environmental problems and less cheating on tax-related matters. That said, AQSIQ recognized that "some suppliers are illegally using the exporter registrations of others, sometimes without the [original] supplier ever knowing it," Hao said, adding that the agency is planning to combat such actions.
AQSIQ is unifying its many documents and regulations on scrap imports, with the goal of issuing a streamlined document in the "coming months," Hao said. By the end of 2009, the agency will issue a revised AQSIQ supplier registration application procedure for new applicants only, he noted. This new procedure will require a mere five documents in the initial application stage, but—unlike past registration procedures—it will require an on-site inspection by AQSIQ or one of its designees. The point of the on-site inspection, he explained, is to ascertain whether "the applicant uses its own facility for the processing of material."
Buyers Behaving Badly
In truth, scrap shippers at the CMRA event were less interested in statistics and regulations than in market information—specifically, how the market downturn had led to a rash of reneged contracts and broken business relationships, and what they could to do to resolve such thorny problems. Though attendees were courteous in the forum's common areas, some speakers raised the tension level with their candid remarks. Bob Garino, ISRI's director of commodities, reported that ISRI had heard from "astonishing numbers of our members" about Chinese buyers failing to pay for scrap shipments or reneging on open contracts and seeking "extraordinary discounts" from the contracted price for scrap materials after those materials reached China. "In some cases," he stated, "we have also heard from shippers who have been carrying on business with their buyers for many years, without any significant problems, suddenly receiving dramatic quality-related claims." Garino warned that the failure to honor one's commitments could "have long-lasting implications for the possibility of any future business."
Bob Stein of Alter Trading Corp. (St. Louis), who also serves as Nonferrous Division president for the Bureau of International Recycling (Brussels), spoke in even starker terms. As background, he noted that the decade-long consolidation of the North American scrap industry "means that more metal is held in stronger hands than before." The consolidated companies will be "less forgiving of those that present obstacles to the proper disposition of contractual obligations; those who create instead of mitigate problems; and those who would cancel orders or make false claims during times of price declines regardless of where these problems occur, inside [their] own territory or otherwise." He cautioned buyers to play by the rules and consider the ramifications should they fail to meet current obligations "because the rules of the game will be dramatically different in the near future than they have been in the recent past."
The recent contract problems could mean the end of easy credit for Chinese buyers and the 20-percent deposits on scrap shipments that were commonplace between scrap exporters and Chinese importers. In the future, Stein said, "sellers will demand higher rates of performance deposits; standby or other forms of letters of credit; or other guarantees when negotiating business in certain countries." By "certain countries," he meant not only China but also Turkey and India.
No Chinese speaker addressed the contract issue in the conference hall. Instead, CMRA organized a last-minute, invitation-only "trade seminar" for roughly 40 of the world's largest scrap exporters and China's largest importers. The exporters attended the meeting expecting some resolution to their contract grievances, or at least a productive discussion about them. In this, they were sorely disappointed.
The meeting opened with Chinese government representatives detailing the effect of the economic meltdown on China's economy and its secondary metal suppliers. No official mentioned the contract issue until Luo Guo Jun of Ningbo Jintian Copper (Group) Co. (Ningbo, China), China's largest copper tube manufacturer, took the microphone to deny that his company is facing bankruptcy and had ever reneged on a single contract.
This statement took many in the room by surprise because some traders at the forum had stated that Jintian had not paid them for scrap shipments. In response, ISRI's Garino turned to Luo and said, "What you described as a rumor is fact."
Though several other Chinese speakers at the seminar addressed the current market conditions, none touched on the broken contracts. Several, in fact, tried to turn the tables by accusing international scrap shippers of a decade-long practice of delaying scrap shipments to benefit from rising prices. ISRI and BIR representatives denied these accusations and suggested that the Chinese representatives would do better to solve the current contract impasse than cast aspersions on their global suppliers.
In this room full of tested tempers and impatient, tapping feet, it was easy to overlook a subtle but significant mea culpa by Ma Hongchang, CMRA's vice secretary general. Responding to comments by Tony Huang, CEO of Shanghai Sigma, the soft-spoken Ma reminded his Chinese listeners of Sigma's sterling reputation and how the company earned it: "Mr. Huang says build up our credit and never revalue our prices. This is a good lesson to us."
For those not familiar with the subtleties of Chinese social discourse and politics, this was cold comfort. But for those aware of those protocols, as well as Ma Hongchang's prominent standing in the industry, this was nothing less than an order from above. Of course, it did little to calm the tempers of the frustrated international exporters, especially those owed significant sums for cargoes stranded at port.
Three hours after commencing, the seminar broke up with sighs and no resolution to the contract issue. Yet, even among the most frustrated, there was quiet consensus that once the current inventory oversupply is cleared from China's yards and ports, it again will be the world's primary export destination for nonferrous scrap. If they're even partially correct, the ninth CMRA gathering will feature more delegates, more optimism, and more deals made in the conference hall. •
Adam Minter is a journalist based in Shanghai, where he writes about business and culture for U.S. and Chinese publications and maintains a blog, www.shanghaiscrap.com.
International scrap traders tried to make sense of the recent market downturn and vexing contract disputes at last fall's CMRA conference in Beijing, which resolved few grievances but provided valuable dialogue and data nonetheless.