Basic materials markets of all types, including those tied into secondary commodities, have risen to new peaks of global production as China’s population of more than 1.3 billion people has emerged from decades of economic isolation.
As of 2012, China alone was making nearly as much steel as the rest of the world put together. Its production and consumption of aluminium, copper, plastic and paper, and the scrap material used in their production, has soared to similar heights from roughly 1990 to 2012.
China’s hunger for metals, paper and plastic—and the raw materials needed to make them—has buoyed demand and pricing for primary and secondary commodities. A question all along, however, has been: How long can the boom last?
Reading Tea Leaves
For most of the past 10 years, recyclers of many materials in Europe, North America, Australia and Japan have been able to take it for granted that demand for their products would be underpinned by the manufacturing sector in China’s growing economy.
The financial crisis of 2008 caused a notable interruption, but buyers from China came back strong in 2009 as that nation’s government unrolled a sizable economic stimulus plan to keep industrial production growing.
In November of 2012, a new premier and central committee were installed in Beijing. When the National Congress installs a new premier (usually every 10 years) and makes changes to the central committee (usually every five years), investors and business leaders in China watch carefully to try to determine what changes the new leaders will bring.
Coincidentally or otherwise, the most recent leadership change has resulted in a new enforcement effort directed at perceived sub-standard inbound shipments of scrap materials. (See the “Fenced Out” section later in this article.)
The customs scrutiny is one source of concern for recyclers stemming from China but not the only one. Also in the first half of 2013, economic indicators and some investor activity are pointing to the potential slowdown of China’s economic momentum. A early survey of purchasing managers in China released in late April revealed a lower index number than anticipated or seen there for a while.
The China Manufacturing Purchasing Managers Index (PMI), based on a survey conducted by HSBC bank, Hong Kong, revealed a slower pace of growth in April 2013. According to a Wall Street Journal news report, the index number fell to 50.5 compared with 51.6 in March.
The 50.5 figure is “barely in expansionary territory,” noted the Wall Street Journal, as a number above 50 indicates growth, while a figure below 50 means contraction.
The PMI index result was not welcome news coming on the heels of the Chinese central government’s own admission that the nation’s GDP grew at a 7.7% annual rate in the first quarter of 2013—down from the 7.9% growth experienced in the final quarter of 2012.
As the Wall Street Journal also reported, the slowdown may not be greeted this time by the central government with an impulsive reaction to stimulate the economy. “Despite disappointing growth, the tone of policy makers’ comments in recent days has suggested limited appetite for further economic stimulus, unlike its massive spending program adopted after the global financial crisis of 2008,” wrote the Journal’s Richard Silk.
Silk pointed to comments from China’s premier and its central bank governor, each of whom hinted at “prudent” monetary policy and the need to “sacrifice” short-term economic growth to provide a more stable and reformed economy.
In its assessment of how a slowdown in China will affect the world economy, Bloomberg Businessweek, www.businessweek.com, points to commodities in particular.
An economist contacted for the Bloomberg Businessweek story calls this bad news for nations in Latin America or the Middle East that export raw materials, and as well it is being felt and will be felt by recyclers.
In the early months of 2013 shippers of scrap materials into China have slowly begun to learn about “Operation Green Fence,” an effort by Chinese environmental and customs officials to more vigorously inspect (and more willingly reject) what they consider to be sub-par container loads.
At the U.S.-China Scrap Trade Consult Meeting at the Institute of Scrap Recycling Industries Inc. (ISRI) 2013 Convention & Exposition, held April 9-13 at the Orange County Convention Center in Orlando, Fla., those in attendance learned more.
Wang Jiwei, vice president and secretary general of the China Nonferrous Metals Industry Association Recycling Metal Branch (CMRA), referred to Operation Green Fence as a 10-month effort by China’s customs agency “to strengthen the supervision” of environmental standards.
According to Wang, the Green Fence initiative has a timeline running from February to November 2013 that will focus on random inspection of all forms of “imported waste,” meaning metallic, plastic, textile, rubber and paper scrap materials.
Wang said the initiative did not involve new regulations but “strengthens Article 12,” which was issued in April 2011. (That article states, “In the process of importing solid waste, measures shall be taken to prevent it from spread[ing] seepage and leakage or other measures to prevent pollution of [the] environment.”)
He said the intention of Operation Green Fence is in part “psychological,” to make shippers know China will “strictly examine the import application and [consider whether] to approve the import license” of shippers who are caught sending sub-standard material.
Wang showed photos of inbound containers with shortcomings that went beyond liquid contamination, however. Problems presented in Wang’s photos included living mice, bullets and combustible flares included in a container load of juice boxes. “These prohibited materials are not allowed to enter China,” he stated.
Severe interruptions in scrap shipments to China are bound to have a significant effect. Speaking at a different ISRI convention session, Liu Shengming of the China Certification & Inspection Group (CCIC) noted that the number of containers filled with scrap materials continued to grow from 2010 to 2012.
Liu said North America sent 698,000 containers filled with scrap materials to China in 2012, up from 635,000 in 2011 and 570,000 in 2010. Only 0.04% of those containers were found to be “unqualified,” he said, adding, “the percentage is really low.”
By volume, recovered fibre was the foremost commodity shipped in 2012, followed by plastic scrap and then nonferrous metals.
Checking in with the Neighbours
Secondary commodities traders may have grown accustomed to dealing with China in the past 10 years, but by no means have basic materials producers in Japan, South Korea, Taiwan, Indonesia, Malaysia, Vietnam, Thailand and any number of other nations stopped importing scrap materials.
To a great extent, China’s surging economy has helped buoy the fortunes of neighboring East Asian nations, whether they are in a position to ship raw materials or finished goods to China.
The economies of these nations still can be influenced by other factors, as witnessed in South Korea. According to a mid-April Bloomberg News item, South Korea’s economy “grew the most in two years in the first quarter [of 2013] as the government front-loaded spending and exporters weathered the slide in the yen that aids rivals in Japan.”
However, as China’s economy shifts from 7.9% growth down to 7.7%, nations like South Korea and Japan are dealing with much smaller numbers. “GDP gained 0.9% from the previous three months after a 0.3% increase in the fourth quarter [of 2012],” notes the Bloomberg report, citing Bank of Korea figures.
A $15 billion (€7.7 billion) stimulus bill that helped spur the growth may help the Korean economy sustain forward momentum, though a slowdown in China may negate that effect.
A change in government in Japan has new Prime Minister Shinzo Abe attempting to jump-start the nation’s long moribund economy with a series of steps that has gained the name “Abenomics.”
As noted in a mid-April U.S. News and World Report article, the new prime minister’s task involves “the complete reversal of the decades of slow growth and deflation that have afflicted Japan since its economy crashed in 1991.”
Among the steps Abe wants to take is opening up industries to greater competition, including global competition. Whether that brings with it opportunities for scrap merchants is questionable, as Japan is a net exporter of most scrap materials and is considered to be in a scrap surplus situation. However, should Japan’s manufacturing sector heat up because of a long overdue economic rebound, opportunities may be created.
Leaders in the ASEAN (Association of Southeast Asian Nations) trading bloc are moving toward an economic and trade agreement that these countries believe will contribute significantly to their economic growth.
Reporting for Live Trading News, www.livetradingnews.com, Paul Eberling Jr. writes in late April that the negotiations include “all 10 member states and their six free trade agreement partners, namely: Australia, China, India, Japan, South Korea and New Zealand.” The ASEAN member states are Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.
If the deal among all 16 nations expands into a Regional Comprehensive Economic Partnership (RCEP), it could create the world’s largest free trade bloc and promote significant economic growth by 2025, according to Eberling and a report he cites by the Asian Development Bank.
The inclusion of China and India along with the 14 other nations in the RCEP “will span 16 countries with a combined market of over 3 billion people and a combined GDP of about $19.78 trillion (€15.1 trillion) based on 2011 figures,” notes the report.
To what extent trading from outside the RCEP bloc would become either easier or more difficult for secondary commodities shippers is uncertain, though it may provide flexibility for recycling companies doing business there to maintain offices and plants within the bloc.The RCEP negotiations are still in their early stages, but a formal treaty may be signed as early as 2015, writes Eberling.
The author is editor of Recycling Today Global Edition and can be contacted at email@example.com.