JANUARY/FEBRUARY 2007

China’s Maturing Market

China is focused on bringing order, environmental compliance, and lawfulness to its scrap industry, according to speakers at a recent China recycling forum. Less clear, though, is how those initiatives will affect the country’s scrap trading partners around the world.

B ADAM MINTER

In its five-year history, the China Secondary Metal International Forum has invited numerous Chinese government officials, scrap industry leaders, and academic experts to address the necessity, means, and will for China to modernize its nonferrous scrap metal recycling industry. It wasn’t until this year, though—at the sixth forum, held Nov. 8-9 in Taizhou—that forum participants saw the results of those previous discussions and speeches.
   Indeed, the evidence was literally visible outside the conference hotel: Taizhou, a major scrap center once notorious for environmentally unsafe processing, is being transformed. The city’s small-scale dismantlers, many based in home workshops, are virtually gone. Now its major scrap processors reside in one of China’s most advanced—and environmentally strict—resource-recycling parks. Though Taizhou, located in east China’s Zhejiang province, isn’t representative of China’s scrap recycling industry as a whole, it certainly symbolizes the direction China’s top regulators want the scrap industry to go. It’s no accident, then, that the forum’s organizer—the China Nonferrous Metals Industry Association’s Metal Recycling Branch—chose Taizhou for this year’s event.
   Like past forums, the 2006 meeting presented Chinese statistics, policy, and policymakers unavailable at any other conference or under any other circumstances. Also, in keeping with a trend seen at the last two forums, the sixth forum offered a higher level of openness, including printed text of new Chinese regulations and laws related to the recycling industry, plus a question-and-answer period with a panel of high-ranking Chinese government officials—a first at a Chinese scrap forum.
   Overall, the forum showed a Chinese nonferrous scrap industry undergoing a transformation. Environmental regulations, large-scale consolidation, and resource parks are reshaping the business into a more efficient and law-abiding industry while creating new challenges and opportunities for international scrap shippers and Chinese importers. Most important, a long-awaited domestic Chinese recycling market is beginning to emerge, and the scrap industry is already feeling its consequences.

Onward—and Still Upward
To open the forum, Wang Gongmin, president of the China Nonferrous Metals Industry Association, presented the association’s annual report on China’s recycling industry. This report included statistics indicating continued robust growth in Chinese secondary metal production. According to Wang, China’s secondary nonferrous production for the first three quarters of 2006 was 1.26 million mt of copper, up 19 percent compared with the same period in 2005; 1.76 million mt of aluminum, up 21 percent; and 300,000 mt of lead, up 42 percent. Total secondary nonferrous 
production was expected to reach 4.5 million mt in 2006, an increase of 20 percent over 2005, Wang said.
   A significant portion of that production was based on imported scrap. For the first three quarters of 2006, China imported 3.47 million mt of copper scrap with a copper content of 700,000 mt (down 3 percent compared with the same period of 2005), 1.27 million mt of aluminum scrap containing 1.01 million mt of aluminum (up 3 percent),
and 560,000 mt of zinc scrap containing 340,000 mt of zinc (down 2 percent).
   “Of course,” Wang cautioned, “the statistics cannot be so accurate.” Wang expected China’s total nonferrous scrap imports for 2006 to reach 6.4 million mt, a net decrease of 2 percent from 2005. One surprise was that Japan was the top shipper of nonferrous scrap to China in the first three quarters, at 1.48 million mt. The United States was a distant second, at 805,000 mt shipped, followed by Australia at 690,000 mt, Spain at 335,000 mt, and the Philippines at 214,000 mt, Wang said.
   In another surprise, the Hangzhou customs region—which includes Taizhou—was the leading importer of nonferrous scrap in China in the first three quarters, at 1.21 million mt. The Guangzhou region in Guangdong province, traditionally China’s most active scrap importer, was a close second at 1.09 million mt, followed by Ningbo (938,000 mt), Tianjin (617,000 mt), and Shanghai (353,000 mt). These statistics confirm that Zhejiang province—and 
especially the corridor from Ningbo to Taizhou—is now the leading nonferrous scrap processing zone in China, importing twice as much scrap in the first three quarters of 2006 as Guangdong. Notably, these figures reflect legal imports, and the movement toward better environmental and customs compliance—particularly in Zhejiang—suggests that the Chinese scrap industry’s focus is trending northward, toward regions where customs and environmental regulations are obeyed more consistently than they are in the south.
   Regardless of region, the production capacity of China’s secondary nonferrous industry continues to grow, Wang noted. Secondary aluminum production capacity has increased 300,000 mt in the last year and is expected to reach 2.3 million mt in 2006, despite government efforts to slow the industry’s expansion. Companies with annual production in excess of 10,000 mt are building almost all of this additional capacity, consistent with Chinese government goals to consolidate the industry and increase the scale of its enterprises. Even so, Wang said, companies with annual production of only 5,000 to 10,000 mt are “still the mainstream.”
   China’s secondary copper industry, meanwhile, is beginning to shows signs of overcapacity. Zhang Xizhong, director of the Beijing Zhongse Metal Recycling Institute, said China has 200,000 mt of secondary copper production capacity under construction or in the advanced planning stages, even though its copper consumption declined 6 percent in the first three quarters of 2006 compared with 2005, slipping from 2.84 million mt to 2.44 million mt. For the year, China’s copper consumption was expected to decline 9 percent, a striking contrast to the 19.7 percent consumption has increased, on average, each year since 2000. “This is the first consumption decrease since 1994,” Zhang said. “This decrease can be a signal or hint for the fast-growing copper industry.”
   Looking at lead, several conference presenters said the rapid development of China’s secondary lead industry is
an important example of how China is handling its increasing volumes of domestically generated scrap. In the last year, Chinese secondary lead production has increased 42 percent, a development Wang Gongmin attributed to two factors: mergers and the fact that a large number of Chinese primary lead producers began recycling lead-acid 
automobile batteries. Of special interest was the news that the Jiangsu Alloys Group entered into a joint venture with a Singapore-based partner to open a new secondary lead smelter focused on the recycling of lead-acid batteries by the end of 2006. This facility was expected to have an annual production capacity of 315,000 mt—more than the output of China’s entire secondary lead industry in 2005. Other large-scale secondary lead smelters are on the horizon to address the growing amount of lead-acid batteries entering the Chinese recycling stream.
   Li Fuyuan, president of Hubei Jinyang Metallurgical Inc., a lead recycler that’s expanding its annual capacity from 50,000 mt to 100,000 mt, estimated that China generated 700,000 mt of lead scrap domestically in 2005. Of that, 80 percent came from batteries (lead-acid and other types); 5 percent from lead in cable and wire, printing lead, and other scrap lead; and the remaining 15 percent from factory dust and other residues. Quantities of all types of lead scrap are expected to grow rapidly over the next several years, reaching an estimated 1.1 million mt annually by 2010, Li estimated. Wang pointed out that China has made it a national priority to handle these hazardous materials in an environmentally sound manner. In fact, of the US$12 million that the Chinese government has set aside to support technological innovation in the recycling industry, a significant portion is focused on developing environmentally secure solutions to lead scrap.
   According to Wang, six ministries and committees of the Chinese government, including the National Development and Reform Commission, supported 13 pilot projects in the secondary metal industry from October 2005 to October 2006, and that support will soon expand. The Chinese Ministry of Science & Technology is preparing its own technology research support program, with a special emphasis on finding appropriate technologies to handle “household appliance and electronic products.” For now, imported scrap dominates China’s nonferrous scrap recycling industry, but all of the country’s recycling technology research projects seek solutions for the increasing amount of domestically generated scrap. One such trial project—the Hunan Luobo Secondary Resources Industrial Zone in landlocked south-central Hunan province—encompasses 65 companies with the annual capacity to process 60,000 mt of copper scrap, 80,000 mt of aluminum scrap, 30,000 mt of steel scrap, and 150,000 mt of plastic scrap.
   At the same time, Chinese regulators continue to support the development and expansion of scrap dismantling zones, or recycling parks, devoted to imported material. As of November 2006, China had 10 such zones, with
at least five additional ones planned. Speakers repeatedly pointed to Taizhou’s successful management of its parks and recycling companies as an example of the positive influence that strict, uniform regulations can have on the environment.
   In April 2003, Taizhou became one of the first municipalities to adopt the consolidated recycling zone concept. It currently operates two parks, with total scrap disassembly capacity of 2.5 million mt a year. According to Zhang Hongmin, Taizhou’s mayor, the companies in these parks must conform to specific standards, including
• handling all storage and processing
in workshops sheltered from rain and other water;
• incinerating electrical scrap in furnaces powered by a fuel other than wood (in an effort to end open burning in pits);
• preprocessing wastewater, then transferring it into collective wastewater treatment facilities; and
• sending unrecyclable waste to a collective landfill.
   The impact of these regulations has been profound, at least anecdotally. Longtime visitors to Taizhou couldn’t believe how much the city’s environment had improved in recent years. Among other changes, they noticed that open burning of scrap is no longer visible on city streets—or even in back alleys—and the air quality has improved perceptibly.
   According to the mayor, Taizhou’s scrap industry employs more than 100,000 laborers (roughly 25 percent of the city’s population); recycled about 2.3 million mt of scrap in 2005, including material transferred to the city from other ports and domestic sources; and posted total sales of more than US$2.5 billion. These successes and volumes have encouraged the Taizhou government to develop a municipal plan to further expand its recycling industry. The production goals are ambitious: By 2010 Taizhou’s secondary metal industry is expected to manufacture 1.5 million mt of copper, 500,000 mt of aluminum, 200,000 mt of lead and zinc, 300,000 mt of stainless and silicon steel, and 2.5 million mt of steel. In preparation, Taizhou has set aside 1,000 acres on a coastal salt field near its port for a recycling park with an annual processing capacity of 5 million mt.
   Forum participants could see this large-scale future already at work at Chiho-tiande, Taizhou’s largest scrap
recycling company, which hosted a tour of its 35-acre facility during the conference. According to company information, Chiho-tiande expected to import 12,000 containers of scrap metal in 2006 and process in excess of 200,000 mt of material. The tour showed roughly 2,000 Chiho-tiande employees at work steadily breaking motors, as dozens of forum participants wandered through multiple football field-sized warehouses. It was a startling demonstration of Taizhou’s—and China’s—future as a large-scale, consolidated recycler.

Regulating Recycling
Continuing a practice begun at the 2005 forum, Chinese national government officials who oversee the country’s recycling industry gave consecutive speeches on the first morning of the conference. Unlike last year, though, those government officials then submitted themselves to an hour-long question-and-answer period. This unprecedented exchange gave forum attendees a clear picture of how the Chinese government views the recycling industry and how
it will regulate the business in the coming years.
   On a national basis, China’s environmental authorities are working together with high-ranking Chinese government officials to implement national policies on recycling. Feng Liang, vice director of the Resource Saving and Environmental Protection Department of the National Development and Reform Commission, announced that “the law on national recycling is finished” and will be implemented in 2007. Feng also announced that the long-awaited national law on electronics recycling is being reviewed at the State Council and will be implemented “soon.” Feng and Wang Suli, vice manager for policies, laws, and regulations at the State Environmental Protection Administration, provided no details on the content of these two laws. They suggested, however, that a top priority is assuring that large, compliant enterprises don’t have to compete for material with small workshops that use less expensive but environmentally unfriendly methods of scrap processing.
   In addition, Wang suggested that the new national recycling law will establish a “network of enterprises” with access to a “guaranteed supply” of material. China also is in the preliminary stages of establishing health and safety regulations for the recycling industry “to prevent damage to human health,” he said. Further, Wang announced that SEPA will issue a final national regulation for recycling parks and zones that standardizes enforcement and requires the parks to be near a port to consolidate operations and improve environmental compliance.
   Indeed, compliance with laws and regulations was a major theme in speeches by government officials at the 2006 forum. Traders involved in southern China’s markets were particularly interested in remarks by Zhu Fang, vice director of the inspections department of the General Administration of Customs, who noted the recent crackdown on the smuggling of illegal recyclables into Guangdong province. “If you have four containers in Taizhou, the four cargoes will match the four invoices,” he said as a way of explaining why the south is a target. “But in Guangdong, the invoices will all be different from the cargoes. So that means we have a problem in the Hong Kong import channel.” Without ambiguity, Zhu stated, “We will continue carrying out our strike on illegal enterprises in Guangdong.”
   On a more positive note, Chinese Customs is about to implement a major policy shift toward “regulating on the basis of compliance history,” Zhu said. As he explained, shippers to China and Chinese importers will have their cargoes inspected based on a grade reflecting past compliance history. A-grade shippers and importers will bypass
customs entirely and be subject only to irregular inspections. B-grade shippers and importers—the category that covers most operators, Zhu said—will be subject to normal inspection rates and procedures. C-grade companies will require additional inspections, and a D-grade designation will result in blocked shipments.
   Wang Jide, director of the turnover tax department of the State Administration of Taxation, focused on the need for an orderly tax policy to tame a disorderly recycling industry. “Our purpose is not to take money from you,” he told an attentive, mostly Chinese, audience. “It is to help standardize your industry.” Wang then reviewed just how disorderly—from his perspective—the scrap recycling business had become, asserting that “the crime rate in scrap metal is quite high, and our tax officials aren’t trained for this.” As an example, he asked the audience to imagine a truck of mixed scrap metal. “Now, you are experts, and you cannot estimate its value, so how can our tax officials?”
   According to Wang, the problem is compounded because “some of our tax officials are involved in these crimes.” In fact, he said, the problem of cheating on value-added tax rebates related to scrap has become so serious that qualified businesses are “afraid to deduct the tax” out of concern that they may do it incorrectly and thus be implicated in a crackdown on VAT cheaters.
   Despite the challenge of implementing policies to solve such problems, the government officials at the forum were optimistic and supportive. Feng Liang of the National Development and Reform Commission, though critical of the scrap industry’s tax compliance record, was encouraging about its role in China’s industrial development. “Personally,” he said, “I believe that we need sustainable development in China, and your industry will play an important role in making it happen.” 

Adam Minter is a journalist based in Shanghai, where he writes about business and culture for U.S. and Chinese publications.