by MAURA KELLER
Not long ago, China was the global purchaser of scrap metal. Tons of scrap metal were purchased and shipped to China, so it could be melted and re-used for new products.
The fact that we had open trade made the purchase of scrap metal financially viable with China. China recently decided that it did not want to be a “global dump” and moved to impose trade barriers to scrap metal, announcing in 2018 its intention to ban the import of all recycled materials by 2020. So where does this ban of scrap metal stand now that we have entered the third quarter of 2020?
According to Villanova University’s professor of chemistry, Dr. Marta Guron, China is further restricting the purity of scrap metal they will accept from foreign countries in an ongoing effort to limit imported “garbage” from other countries.
“This is in addition to the tariffs already placed on American scrap metal and continuing tightening on the purity of the metal they will accept,” Guron said. Additionally, for the companies that do ship to China, many are required to demonstrate to the Chinese government that they have the capability to purify metals to the degree sought after by China.
As Babak Hafezi, partner at HafeziCapital International Consulting and Investment and adjunct professor of international business at Kogod School of Business at the American University explained, currently China is imposing import quotas (a form of non-tariff barrier) on high-grade copper and aluminum scrap (Category 6 in China), and banning other imports such as low-grade copper scrap (Category 7). Furthermore, the number of Chinese ports that can now accept the materials has decreased to just 18.
“It is important to understand that scrap metal was the epicenter of China’s growth model in the late 1970s-1980s,” Hafezi said. “China’s free trade zones started breaking down scrap metals of old Chinese ships to be traded via Hong Kong, and that started the initial foreign direct investment into China. China is looking to move up the supply chain of development, and thus the new outlook of metals will be focused on high-value metals that are a necessity of high-tech.”
As Hafezi further explained, the current China ban on scrap metal is part and parcel of a slow economic migration within China from a manufacturing hub to a tech hub. By forcing limits on manufacturing, it forces domestic economic forces to migrate to other investments. Hence, the decree issued by Chinese authorities was a means to remind the domestic market that the focus within the Chinese economy is changing.
“The language and implementation changed from a full ban, to a softer language stating ‘the state shall gradually and basically realize zero imports of solid wastes,’” Hafezi said. “The focus within the Chinese economy has been to slowly change and move up the development ladder of production, innovation and consumption.”
Given that scrap metals were the genesis of the Chinese economic growth and primary means of Foreign Direct Investment into the Chinese economy by Hong Kong investors, the industry has matured in a way that no longer benefits the domestic Chinese market in terms of cost and environmental factors.
Short and long term outlook
It is critical to understand that the China ban does not eliminate global demand for scrap metal, but rather displaces it to other countries and regions of the world. According to Hafezi, new and growing manufacturing hubs such as Vietnam, India, Malaysia, Mongolia, Thailand, Indonesia and the Philippines will gain as China leaves the void. However, many of the companies in those countries will be either Chinese subsidiaries or Chinese minority investors.
In the short term Hafezi said scrap metal prices will be impacted with a decrease in price.
However, we should not see major movements in price, given that the ban was announced over a year ago, and the market has been ready for the change. As Hafezi explained, global demand for commodities in general has decreased for most of 2020 given the global impact of COVID-19.
“We saw prices decrease in the first quarter of 2020 because of the quarantine imposed by the Chinese government in the Hubei Province, which is the manufacturing epicenter of China,” Hafezi said. “The closing of factories forced a lack of demand thus decreasing prices, but once those factories slowly opened, we saw price stabilization to its previous 12-month range-bound rate. Once the global economy recovers from the impacts of COVID-19, overall demand will once again increase.”
Furthermore, as Hafezi explained, the price of steel and scrap metals in the U.S. market will be primarily impacted by the level of domestic economic growth. The growth of the American economy post COVID-19 will be a primary element that will impact the price within the U.S.
“As the U.S. slowly emerges from the quarantine and factories, retail and services businesses open-up, the level of demand and domestic economic growth will impact the price of scrap metal within the country,” Hafezi said. “If tariffs are removed in the coming years, we should see U.S. steel prices reach equilibrium with that of global prices.
And the Chinese ban may impact U.S. companies in that they may have to look at new markets to sell their goods.
“Again, demand will not be eliminated but rather displaced and thus new and emerging companies will form in other countries that will be buyers for these commodities,” Hafezi said. “These countries may be less sophisticated, and lack the necessary infrastructure, however those barriers will dissipate with time as demand forces these positive changes within the segment of the industry. Eventually with time, these new emerging countries and companies will become globally competitive in terms of supply chains, sales and marketing and leading human capital.”
However, Guron said that if other countries, including the U.S., step up their purification processes or manufacturing abilities, there is a chance the market can bounce back from these changes made by China. In many ways, Guron expects these changes would have the same effect as when China began to require more stringent purity of recyclable plastics for manufacturing, dropping their accepted impurity levels to a basically unattainable 0.5 percent.
“We are still facing the consequences of this, because we don’t have the infrastructure to make use of this recycled plastic in the U.S., so unfortunately, some of it has been forced to go to landfill or at best, be incinerated for fuel,” Guron said.
As Guron explained, there also is a push to change the wording associated with scrap metal from “solid waste” to “resource” in an attempt to circumvent China’s goal of having no foreign scrap by the end of 2020.
“If that works, countries may still be able to export some of their high purity scrap metal there,” Guron said. “If that does not work, however, countries foreign to China will no longer have the ability to ship scrap metal to China.”
Published in the August 2020 Edition